• The article explains how to create a Lightning Network smart contract for income distribution based on specific conditions, using an example scenario from a question posted on Bitcoin Stack Exchange.
• The article describes the steps, benefits, and challenges of the solution, and provides a diagram to illustrate it.

The Lightning Network is a second-layer solution that enables fast and cheap transactions on top of the Bitcoin blockchain. It uses smart contracts to create Payment channels between users, allowing them to exchange bitcoins without broadcasting every transaction to the network. This reduces the load on the blockchain and lowers the fees for users.

One of the advantages of the Lightning Network is that it allows users to create custom smart contracts that can execute complex logic based on specific conditions. In this article, we will explore how to create a Lightning Network smart contract for income distribution based on specific conditions, using an example scenario from a question posted on Bitcoin Stack Exchange.

The Scenario

The question asks if it is possible to set up a Lightning wallet (contract) that implements the following scenario:

• Person A creates a wallet with wallet number A_WALLET_NR
• Person A creates a wallet with wallet number INVEST
• Person A creates a wallet with wallet number REVENUE
• Person B with wallet number B_WALLET_NR inputs 1000 Satoshi into INVEST.
• For all other persons C adding 50 Satoshi into Wallet REVENUE:
  • Until (B_WALLET_NR has retrieved 2×1000 Satoshi from REVENUE):
    • wallet B_WALLET_NR gets half of REVENUE income automatically.
    • wallet A_WALLET_NR get half of REVENUE income automatically.
  • After (B_WALLET_NR has received 2×1000 Satoshi from REVENUE):
    • wallet A_WALLET_NR gets all income.
• The revenues are split, with multiple investors (that have not yet been paid off 2x their investment) according to key: 1/ (number_of_investors+1)
• A minimum investment amount into INVEST is set of 999 Satoshis (to prevent a single investor with multiple wallets from flooding the distribution key).

The Solution

The solution to this scenario involves creating a series of payment channels between the wallets, using hashed timelock contracts (HTLCs) and conditional payments. HTLCs are a type of smart contract that allow users to lock funds in a payment channel until a certain condition is met, such as revealing a secret or waiting for a certain time. Conditional payments are payments that depend on the outcome of another payment, such as paying someone only if they pay someone else first.

The steps are as follows:

• Person A creates three wallets: A_WALLET_NR, INVEST, and REVENUE. Each wallet has its own public and private key pair, and its own Lightning node.
• Person A opens a payment channel with INVEST, funding it with some amount of bitcoins. This channel allows Person A to send and receive payments from INVEST.
• Person A opens another payment channel with REVENUE, funding it with some amount of bitcoins. This channel allows Person A to send and receive payments from REVENUE.
• Person B opens a payment channel with INVEST, funding it with 1000 Satoshis. This channel allows Person B to send and receive payments from INVEST.
• Person B sends 1000 Satoshis to INVEST, using an HTLC. This HTLC locks the funds in the channel until Person B reveals a secret or until a certain time expires. The secret is known only to Person B and INVEST, and the time is set by Person B.
• INVEST sends 1000 Satoshis to REVENUE, using a conditional payment. This payment depends on the outcome of the HTLC between Person B and INVEST. If Person B reveals the secret, REVENUE receives the payment. If Person B does not reveal the secret before the time expires, INVEST receives the payment back.
• REVENUE sends 500 Satoshis to A_WALLET_NR and 500 Satoshis to B_WALLET_NR, using two conditional payments. These payments depend on the outcome of the conditional payment between INVEST and REVENUE. If REVENUE receives the payment from INVEST, A_WALLET_NR and B_WALLET_NR receive their payments. If REVENUE does not receive the payment from INVEST before the time expires, INVEST receives its payment back.
• Person C opens a payment channel with REVENUE, funding it with 50 Satoshis. This channel allows Person C to send and receive payments from REVENUE.
• Person C sends 50 Satoshis to REVENUE, using an HTLC. This HTLC locks the funds in the channel until Person C reveals a secret or until a certain time expires. The secret is known only to Person C and REVENUE, and the time is set by Person C.
• REVENUE sends 25 Satoshis to A_WALLET_NR, 25 Satoshis to B_WALLET_NR, and 25 Satoshis to INVEST, using three conditional payments. These payments depend on the outcome of the HTLC between Person C and REVENUE. If Person C reveals the secret, A_WALLET_NR, B_WALLET_NR, and INVEST receive their payments. If Person C does not reveal the secret before the time expires, REVENUE receives the payment back.
• The process repeats for each new person who wants to invest in REVENUE or contribute to REVENUE.

The Benefits

The benefits of this solution are:

• It allows Person A to create a smart contract for income distribution based on specific conditions, without relying on a third party or a centralized platform.
• It leverages the Lightning Network to enable fast and cheap transactions, without congesting the Bitcoin blockchain or paying high fees.
• It uses HTLCs and conditional payments to ensure that the payments are atomic, meaning that either all parties receive their payments or none of them do. This prevents double-spending or cheating by any party.
• It allows multiple investors to participate in the income distribution, with a fair and transparent formula that is enforced by the smart contract.

The Challenges

The challenges of this solution are:

• It requires all parties to run their own Lightning nodes and maintain their payment channels. This may be technically complex or costly for some users.
• It depends on the availability and reliability of the Lightning Network. If the network is congested or offline, the payments may be delayed or fail.
• It exposes all parties to the risks of the Lightning Network, such as channel closure, theft, or loss of funds. These risks can be mitigated by using proper security measures and backups.

The Conclusion

In this article, we have shown how to create a Lightning Network smart contract for income distribution based on specific conditions, using an example scenario from a question posted on Bitcoin Stack Exchange. We have explained the steps, benefits, and challenges of the solution, and provided a diagram to illustrate it. We hope that this article has been informative and helpful for anyone who is interested in creating custom smart contracts on the Lightning Network.

Frequently Asked Questions (FAQ)

Question: What is the Lightning Network?

Answer: The Lightning Network is a second-layer solution that enables fast and cheap transactions on top of the Bitcoin blockchain. It uses smart contracts to create payment channels between users, allowing them to exchange bitcoins without broadcasting every transaction to the network.

Question: What is a smart contract?

Answer: A smart contract is a self-executing agreement that is encoded in a computer program and enforced by a blockchain. It allows users to create custom rules and logic for transactions, without relying on a third party or a centralized platform.

Question: What is an HTLC?

Answer: An HTLC is a hashed timelock contract, a type of smart contract that allows users to lock funds in a payment channel until a certain condition is met, such as revealing a secret or waiting for a certain time.

Question: What is a conditional payment?

Answer: A conditional payment is a payment that depends on the outcome of another payment, such as paying someone only if they pay someone else first.

Question: What are the advantages of using the Lightning Network?

Answer: The advantages of using the Lightning Network are:

• It enables fast and cheap transactions, without congesting the Bitcoin blockchain or paying high fees.
• It allows users to create custom smart contracts that can execute complex logic based on specific conditions.
• It enhances the scalability and privacy of Bitcoin transactions.

Question: What are the disadvantages of using the Lightning Network?

Answer: The disadvantages of using the Lightning Network are:

• It requires users to run their own Lightning nodes and maintain their payment channels. This may be technically complex or costly for some users.
• It depends on the availability and reliability of the Lightning Network. If the network is congested or offline, the payments may be delayed or fail.
• It exposes users to the risks of the Lightning Network, such as channel closure, theft, or loss of funds. These risks can be mitigated by using proper security measures and backups.

Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. The author is not responsible for any loss or damage caused by using or relying on this article. The reader should do their own research and consult a professional before making any decisions regarding Bitcoin or the Lightning Network.

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